Monthly Archives: November 2015

Like other middle market lenders, American Capital experienced a slowdown in underwriting activity in the third quarter. The finance company (NASDAQ: ACAS) underwrote $691 million in new investments in the three months ended Sept. 30, compared with $976 million in the the second quarter, according to company presentations and public filings.

Minus $494 million in exits, net new investments totaled $197 million in the latest quarter, down from $382 million in the second quarter.

Among the company’s recent investments is a $170 million unitranche loan backing the buyout of Kele Inc. ACAS underwrites amounts up to $400 million, with holds of up to $150 million.

The following are highlights of select business lines under the ACAS umbrella:

Senior Floating Rate Loans Portfolio
This unit generated $223 million in new commitments during the quarter across 20 investments against $262 million of exits. There are 257 companies in the portfolio, with one listed on non-accrual status with a cost value of $8 million and a fair value of $3 million. This unit targets senior floating rate loans only via the primary and secondary markets. The overall portfolio totals $2.2 billion at fair value, as of Sept. 30. Less than 2.5% of this portfolio is exposed to the energy sector.

One Stop Buyouts Portfolio
This line, which underwrites products up and down the capital stack along with unitranche loans and equity investments, generated $5 million in new investments to existing portfolio companies in the third quarter against $7 million of exits. The portfolio totals $1.2 billion overall.

Sponsor Finance PortfolioThis sponsor-focused business line generated $214 million in third-quarter investments, adding five new companies to the portfolio. Those five deals accounted for $155 million in capital at an average interest rate of 9%, down from 9.2% across second-quarter bookings. Four existing companies absorbed $22 million of third-quarter commitments. The overall portfolio totals $1.5 billion at fair value. The group kicked off the fourth quarter with $138 million in commitments for October.

Structured ProductsThis group has $514 million in outstanding investments at fair value, mostly among CLO investments. In the third quarter, the group booked $147 million in new investments at an average yield of 16.6%, up from 16% among second-quarter bookings, which totaled $155 million.

Non-AccrualsOverall, non-accruals stood at 7.3% at the end of the third quarter, including non-accruals within the European Capital unit. Stripping out the European component, the non-accrual rate lowers to 4.1%. ACAS said it expects recovery rates of about 47.5%.

Spin-offAmerican Capital’s spin-off plan remains a work in progress.

The finance company is pursuing a revised proposal that calls for ACAS to spin off all debt and equity assets, excluding the ACAM unit (American Capital Asset Management), into a new BDC, American Capital Income: (ticker: ACAP).

After the spin-off, ACAS will operate primarily as an asset manager and no longer as a BDC. The ACAM unit has $1.1 billion in assets mainly concentrated among CLO and private equity investments.

The revised spin-off plan follows a 2014 proposal that was scrapped early this year. The initial plan called for ACAS to spin off two BDCs—one that would hold control assets, and the other non-control assets.

ACAS is trading at about a 30% discount to book value: $14.04 vs. $20.44. During the quarter, ACAS repurchased 9.7 million shares for $135 million, which helped lift NAV by $0.23 per share. ACAS remains committed to a previously announced share repurchase program, CFO John Erickson stated last week. If the share price remains at current levels, ACAS would expect to repurchase toward the high end of the $300–600 million range, Erickson said. — Kelly Thompson

American Capital has hired Goldman Sachs and Credit Suisse Securities as financial advisors. Results of the review are expected to be announced by January 31.

At the same time, the company expanded a stock buyback program to a range of $600 million to $1 billion, from an earlier range of $300–600 million. The program runs through June 30.

The company will buy shares at prices below 85% of net asset value per share as of Sept. 30. Net asset value per share was $20.44 as of Sept. 30.

Shares of American Capital were trading at $15.56 in late morning trade on Nasdaq today, up two cents, with the overall market slightly lower.

“The Strategic Review Committee looks forward to a full independent review with the sole goal of maximizing value for shareholders,” said Neil Hahl, chairman of the independent board committee, in a Nov. 25 statement.

The review will evaluate the previously announced plan to spin off a new business development company to shareholders. — Abby Latour

The Leveraged Loan Distress ratio is another story, however. This ratio tracks loans bid below 80% of par in the secondary market. As is evident in the chart, the Distress ratio has spiked noticeably since this summer. – Staff Reports

November, typically one of the busier months of the year for the primary leveraged loan/CLO market, has been unseasonably quiet, and with the U.S. taking time out to celebrate Thanksgiving this week, arrangers have been looking to price any CLOs they can before players begin to exit for the holiday.

As of Nov. 20 the U.S. had priced a total of $4.1 billion from eight CLOs this month, while Europe had notched up €1.28 billion from three deals.

Statistics in 2015 through Nov. 20 are as follows:

Global issuance is $103.26 billion.

U.S. issuance is $89.71 billion from 171 deals, versus $114 billion from 214 deals in the same period last year.

European issuance is €12.21 billion from 30 deals, versus €12.31 billion from 29 deals in the same period last year.

The average bid of LCD’s flow-name high-yield bonds fell 132 bps in today’s reading, to 89.03% of par, yielding 10.58%, from 90.35% of par, yielding 10.05%, on Nov. 19. Performance within the 15-bond sample was deeply negative, with 12 decliners against two gainers and a lone constituent unchanged.

Today’s decline is a seventh-consecutive observation in the red, and it pushes the average deeper below the previous four-year low of 91.98 recorded on Sept. 29. As such, the current reading that has finally pierced the 90 threshold is now a fresh 49-month low, or a level not seen since 87.93 on Oct. 4, 2011.

The decrease in the average bid price builds on the negative 58 bps reading on Thursday for a net decline of 190 bps for the week. Last week’s losses were also heavy, so the average is negative 369 bps dating back two weeks, and the trailing-four-week measure is much worse, at negative 545 bps.

Certainly there has been red across the board, but several big movers of late continue to greatly influence the small sample. For example, in today’s reading, Intelsat Jackson 7.75% notes were off six full points—the largest downside mover today, to 44, and now 20.5 points lower on the month—while Hexion 6.625% paper was off five points, at 73.5, and Sprint 7.875% notes fell 5.5 points, to 77.

The market has been crumbling especially hard this week, with energy and TMT credits leading the charge, amid a lack of participation, the influence of speculative short-sellers, and despite signs that retail cash has been flowing into the asset class. There was a similar dynamic after Thanksgiving last year, sending the average to the year-end low of 93.33 on Dec. 16, 2014.

As for yield in the flow-name sample, the plunge in the average price—with many names falling into the 80s and a couple of others more deeply distressed—has prompted a surge in the average yield to worst. Today’s gain is 53 bps, to 10.58%, for a 2.92% ballooning over the trailing four week. This is a 13-month high and level not visited since 10.70% recorded on June 10, 2010.

The average option-adjusted spread to worst pushed outward by 47 bps in today’s reading, to T+791, for a net widening of 167 bps dating back four weeks. That level represents a wide not seen since the reading at T+804 on Sept. 23, 2010.

Both the spread and yield in today’s reading remain much wider than the broad index. The S&P U.S. Issued High Yield Corporate Bond Index closed its last reading on Monday, Nov. 23, with a yield to worst of 7.88% and an option-adjusted spread to worst of T+652.

Bonds vs. loans
The average bid of LCD’s flow-name loans fell nine bps, to 96.31% of par, for a discounted loan yield of 4.42%. The gap between the bond yield and discounted loan yield to maturity is 616 bps. — Staff reports

The data

Bids fall: The average bid of the 15 flow names dropped 132 bps, to 89.03.
Yields rise: The average yield to worst jumped 53 bps, to 10.58%.
Spreads widen: The average spread to U.S. Treasuries pushed outward by 47 bps, to T+791.
Gainers: The larger of the two gainers was Valeant Pharmaceuticals International 5.875% notes due 2023, which rebounded 3.25 points from the recent slump, to 85.25.
Decliners: The largest of the 12 decliners was Intelsat Jackson 7.75% notes due 2021, which dropped six full points, to 44, amid this fall’s ongoing deterioration of the credit.
Unchanged: One of the 15 constituents was unchanged in today’s reading.

In October, loan mutual funds’ assets under management sank $1.6 billion, to $127 billion, amid further outflows from the asset class, according to data from Lipper FMI and fund filings.

On the plus side, it was the smallest decline in recent months, following negative $4.6 billion and negative $2.8 billion in August and September, respectively, and an increase of $343 million in July.

On the minus side, it leaves total loan AUM at the lowest point since May 2013 and down $48.1 billion from an apex of $175.1 billion in March 2014. – Steve Miller

Based in San Diego, Petco is a leading specialty retailer of premium pet food, supplies and services. The company operates more than 1,400 locations across the U.S., Mexico and Puerto Rico, along with one of the leading e-commerce platforms in the pet industry.

Goldman, Sachs & Co. and J.P. Morgan Securities are acting as financial advisors to Petco. Ropes & Gray acted as legal counsel to Petco. Barclays, Citigroup and Moelis acted as lead financial advisors to CVC and CPPIB. Gibson Dunn acted as legal counsel to CVC and CPPIB. CPPIB was also separately advised by Torys LLP.

Petco last approached the loan market in early 2013 with a repricing of its then $1.2 billion covenant-lite B term loan due November 2017 to L+300, with a 1% LIBOR floor. — Chris Donnelly

The U.S. leveraged finance market logged $8.2 billion in new-issue volume last week, $2.75 billion from leveraged loans and $5.45 billion in high yield bonds, according to S&P Capital IQ LCD.

That’s the smallest amount since the end of the summer, as leveraged loan players, in particular, proceeded deliberately last week after Veritascancelled a planned $5.3 billion debt package backing Carlyle’s LBO of the company.

The high yield market also had Veritas in mind, though a host of issuers drove by the market last week to complete deals, according to LCD’s Matt Fuller. – Staff reports

Security services and software provider Diebold disclosed that it has obtained committed financing totaling roughly $2.8 billion in connection with its planned acquisition of Wincor Nixdorf AG, a German-based IT company.

The financing includes a $1.591 billion, seven-year delayed-draw B term loan; $250 million, five-year delayed draw A term loan; and $500 million bridge loan.

Pricing on the TLB is outlined at L+375, with a 0.75% LIBOR floor. Pricing on the TLA, meanwhile, is tied to a leverage-based grid, at L+125–225, with ticking fees ranging from 15–35 bps. Pricing on the bridge loan is initially set at L+675, increasing 50 bps every three months.

J.P. Morgan and Credit Suisse are acting as joint lead arrangers.

The deal includes a leverage covenant that is initially set at 4.5x, but includes step downs to 4.25x at the end of 2017, 4x at the end of 2018, and to 3.75x by mid-2019. It also includes an interest coverage covenant set at 3x.

Diebold also expects to refinance its existing $520 million revolver and $230 million A term loan, which are both due in August 2019, with a new, equally sized revolver and TLA that will have the same terms as the existing deal, but with the same covenant package as the new delayed-draw term deal.

Under the terms of the acquisition, Diebold will launch a voluntary public tender offer to all shareholders of Wincor. Diebold will offer Wincor shareholders 38.98 in cash plus 0.434 Diebold common shares per Wincor Nixdorf share. This transaction values Wincor Nixdorf, including net debt, at approximately $1.8 billion, or €1.7 billion. The combined company had pro forma revenue of approximately $5.2 billion, or €4.8 billion, for the trailing 12 months ended Sept. 30, according to a company statement. Tender offer expected to commence in early 2016.

Leverage will be roughly 4x at closing, according to an investor presentation. However, Diebold is targeting leverage to fall below 3x after three years.

Following the completion of the offer and subject to certain approvals, the combined company will be named Diebold Nixdorf, with common shares publicly listed on the New York Stock Exchange and the Frankfurt Stock Exchange. The combined company will have registered offices in North Canton, Ohio, and will be operated from headquarters in North Canton and Paderborn, Germany. — Richard Kellerhals